Question: Look again at Table 9.1. This time we will concentrate on Burlington Northern. a. Calculate Burlingtons cost of equity from the CAPM using its own
Look again at Table 9.1. This time we will concentrate on Burlington Northern.
a. Calculate Burlingtons cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk free rate of 3.5 percent and a market risk premium of 8 percent.
b. Can you be confident that Burlingtons true beta is not the industry average?
c. Under what circumstances might you advise Burlington to calculate its cost of equity based on its own beta estimate?
d. Burlington?s cost of debt was 6 percent and its debt-to-value ratio, D/V,?was .40. What was Burlington?s company cost of capital? Use the industry average beta.
Standard Error Bequity Burlington Northern & Santa Fe CSX Transportation Norfolk Southern Union Pacific Corp. Industry portfolio .64 20 46 24 .52 26 40 21 .50 .17
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